‘The lawyers always win’

By Mark Hulbert

Published: Sep 15, 2015 6:00 am ET

Advice to retirement advisers about new fiduciary rule

One message to retirement advisers came through more loudly and clearly than any other during the MarketWatch-hosted panel discussion on the Department of Labor’s proposed fiduciary standard for retirement advisers:

“Hire a lawyer.”

That’s because implementing the new standard will inevitably involve reams of new regulations and complex and almost-certainly confusing compliance requirements. Though the four panelists in the MarketWatch event couldn’t agree on much of anything else, they did agree on this.

Is fee disclosure better than a fiduciary rule?

(2:43)

At a MarketWatch panel discussion, industry experts discuss how retirement investors can discern possible conflicts of interest in their financial advisers, and whether fee disclosure is a solution to those conflicts.

Take Brad Campbell, for example, an attorney with the firm Drinker Biddle & Reath and the former Assistant Secretary of Labor for Employee Benefits and head of the Employee Benefit Security Administration. Though he vehemently opposes the new standard as it is currently written, he noted cynically that “the lawyers always win.”

Not surprisingly, Knut Rostad, co-founder and president of the Institute for the Fiduciary Standard, disagreed with almost everything that Campbell said. And, yet, he conceded that proposed new regulations were “put forth by government bureaucrats” and are “cumbersome” and “overbearing.”

Regardless of its merits, however, the political betting is that the new standard will be adopted in some form or another in coming months. So it behooves advisers to not only be aware of what’s coming but also to begin planning now for how to respond.

The following are the general themes of the panel discussion as they impact retirement advisers.

It will become easier to sell retirement products if you don’t also offer advice, or vice versa — and more difficult if you engage in both. That’s not because the proposed new fiduciary standard automatically prohibits retirement advisers from engaging in both advice giving and sales. But, according to several of the panelists, the new standards create a presumption of suspicion whenever the same adviser or firm is engaged in both activities.

You will have an incentive to pay even less attention to small investors than you do already. This follows from the first theme. Ira Hammerman, executive vice president and general counsel for the Securities Industry and Financial Markets Association, put it bluntly: The new standard “is going to be so complicated and convoluted and punitive” that many firms just won’t bother with the small customer. Note carefully that this may not be as big a deal as it otherwise seems, however, according to Robert Powell, senior columnist at MarketWatch and editor of Retirement Weekly. He argued that the advice industry already pays little attention to smaller investors.

Robo advisers will not necessarily be exempt. To be sure, a lot depends on the specific regulations that are written to implement the new standard. And it certainly seems plausible that robo advisers will at least partially fill the vacuum created by advisers paying less attention to the small investor. But Campbell noted that, at least in some cases, “robo-advisor [firms] may have the same [legal] issues” as humans.

Restrictions may be imposed on the types of securities you are allowed to recommend in retirement accounts. Examples of prohibited investments that Hammerman provided in the panel discussion are “IPOs, foreign securities, [and] options,” among others. “There’s a long list of products that today many of your customers will have in their accounts that might be totally appropriate in a best interest of the customer standard but the Department of Labor, our government, is saying, no, you can’t have that in your IRA account,” Hammerman said.

Be prepared to answer lots more questions from customers about your compensation. Even if the proposed fiduciary standard is ultimately not adopted, the media attention it has garnered in recent months — and inevitably will receive in coming months as its potential adoption date nears — will encourage many more investors to ask questions about how you are compensated and your potential conflicts of interest. As Robert Powell told the panel, “For far too many years people, customers, have operated blindly... How much the insurance agent gets for selling them an annuity? What the commission was? How much was going to the broker? Why are you pushing a Ginnie Mae Fund? You know all these things sort of tainted the industry — and not for the better.”

Actually, there was one other area of general agreement that emerged at the end of the panel discussion: Though the comment period for the proposed fiduciary standard had closed in July, the fight over its adoption and implementation will continue for quite some time. So definitely stay tuned as it works its way through the government bureaucracy; this is definitely not the last you will hear about it.